As CoreWeave (CRWV.US) bonds come under pressure, fund managers who have put real money on the line firmly stand by the company: the sell-off is an "overreaction"

Title context: As CoreWeave (CRWV.US) bonds come under pressure, fund managers who have put real money on the line firmly stand by the company: the sell-off is an "overreaction" Text: That CoreWeave (CRWV.US) can weather the market's doubts about its debt is not a consensus viewsome of CoreWeave's bonds remain in deep distress, with yields above 15%. But in the view of John Lloyd, Global Head of Multi-Sector and Corporate Credit at Janus Henderson, CoreWeave should be able to get through this difficult period. "It's a bit of an overreaction." Lloyd was referring to the sell-off in CoreWeave's bondswhich have plunged alongside its stock. Lloyd holds CoreWeave's 9.75% bonds maturing in 2031 in the firm's Multi-Sector Income Fund. The bonds currently yield 15.97% to maturity, up more than 70% from when they were issued in April. Bond prices move inversely to yields. "Bond prices are lower, spreads are wider, yields are higher, and I don't currently see any major fundamental change in the ecosystem that would justify this move, other than their higher financing costsand I think they can pull some tricks on that front." Lloyd added. $51.6 Billion in Debt and 1,085 Basis Points of CDS CoreWeave has taken on enormous debt to build data centers. The company's total debt is about $51.6 billion, of which roughly $35 billion is in notes, bonds and loans. The market is uneasy about whether CoreWeave can continue to finance its data centers and how high the financing costs will be. Its stock has tumbled 20% over the past week, and its five-year credit default swap (CDS) spread is 1,085 basis pointslower than earlier in the day's session but up 14% week over week. Spreads of 1,000 basis points and above are generally seen as a signal of credit distress. CoreWeave's stock rose about 2% on Tuesday after several days of sustained declines, having touched a 52-week low during the session that day. Its bond yields and spreads remain at extremely high levels. Lloyd believes the sell-off is just a bump in the road for this neocloud company. He explained that the market was spooked by the jump in U.S. Treasury yields, and rising Treasury yields push up corporate financing costs; market attention has therefore shifted heavily toward companies like CoreWeave that face refinancing risk when rates rise. CoreWeave is highly leveraged, with a debt-to-equity ratio of 702%, up from 290% a year earlier. In addition, according to consensus expectations, CoreWeave's capital expenditure this year will be about $36.4 billion, against EBITDA of $7.5 billion. Analysts estimate that revenue and EBITDA will rise to $26.5 billion and $16.7 billion next year, respectively, but capital expenditure will also reach $47.9 billionmeaning the company may need to finance data center construction through more equity offerings and/or debt. "Creative Financing" Although CoreWeave's capital expenditure exceeds its free cash flow, Lloyd is not very worried about its ability to finance that capex. "Next year... they will generate operating free cash flow that can support part of that capex need." he said. He noted that the company can also turn to other financing methods, such as more GPU financingwhich allows it to borrow against graphics processors or lease contracts. In addition, CoreWeave can ask its largest customersincluding Microsoft Corporation, Meta Platforms and OpenAIto increase prepayments. "They can probably pull enough tricks that they won't even have to go into the high-yield bond market." Lloyd said. He added that the company has no debt maturing in the near term, meaning it will not face refinancing risk in the short term. "Best in Class" Meanwhile, supply and demand in the AI compute sector should remain tight. He said overall adoption within the ecosystem is running ahead of the consensus demand curve; combined with supply-side bottleneckschips and memory, and power, are all sold outthis is a good setup for CoreWeave. "All the data shows that this business model is working very, very well." Lloyd said. "CoreWeave is one of the best in class at getting data centers built and actually operating." He noted that CoreWeave's financial condition has been improving throughout the year. Another turning point could come if Anthropic proceeds with an IPO as expected (anticipated in November), followed by OpenAI. Successful listings by frontier labs could soothe market sentiment and support neocloud operators. "You just need more of these data points to make people more comfortable with the AI demand side." Lloyd said. CoreWeave still needs to convince the market that it can cope with higher market interest rates and navigate the financing bottleneck. Lloyd believes the company can get through it, though there will be some bumps along the way. He said the bonds will recover, "just not in a straight line."